Page 84 - DCOM106_COMPANY_LAW

Unit 6: Articles of Association

Notes
Example: T was a director in the investment company. He, purporting to act on behalf of
the company, entered into a contract with the Rama Corporation and took a cheque from the
latter. The articles of the company did provide that the Directors could delegate their powers to
one of them. But Rama Corporation never read the articles. Later, it was found that the directors
of the company did not delegate their powers to T. Plaintiffs relied on the rule of Indoor
Management. Held: They could not, because they did not know the existence of the power to
delegate. [Rama Corporation v. Proved Tin and General Investment Co. (1952) 1 All ER 554].
3. Void or illegal transaction: The rule does not apply to transactions which are void or
illegal ab initio, e.g., forgery.

Example: The secretary of a company forged signature of two of the directors required
under the articles on a share certificate and issued the certificate without authority. The applicants
claimed to be entitled to be registered as members of the company. Held: The certificate was a
nullity and the holder of the share certificate could not take advantage of the doctrine of indoor
management [Ruben v. Great Fingal Consolidated (1906) A.C 439].
4. Negligence: If an officer of a company does something which would not ordinarily be
within his powers, the person dealing with him must make proper enquiries and satisfy
himself as to the officer’s authority. If he fails to make inquiry, he cannot rely on the rule.

Example: A person who was sole director and principal shareholder of a company paid
into his own account cheques drawn in favour of the company. The bank should have made
enquiries as to the power of the director. The bank was put upon inquiry and was accordingly,
not entitled to rely upon the ostensible authority of director [A. L. Underwood v. Bank of
Liverpool (1924) 1 K. B. 775].

6.7 Constructive Notice of Memorandum and Articles

Section 610 provides that the memorandum and articles, when registered, become public
documents and then they can be inspected by anyone on payment of a nominal fee. Therefore,
any person who contemplates entering into a contract with the company has the means of
ascertaining and is thus, presumed to know the powers of the company and the extent to which
they have been delegated to the directors. In other words, every person dealing with the company
is presumed to have read these documents and understood them in their true perspective. This
is known as ‘Doctrine of Constructive Notice’. Even if the party dealing with the company does
not have actual notice of the contents, it is presumed that he has “constructive notice” of them.

Examples:
(i) One of the articles of a company provides that a bill of exchange to be effective must
be signed by two directors. A bill of exchange is signed only by one of the directors.
The payee cannot claim under the bill.
(ii) In Kotla Venkataswamy v. Ram Murthy AIR (1934) Mad. 579, the articles provided
that all deeds and documents of the company shall be signed by the managing
director, secretary and working director. A mortgage deed was accepted with
secretary and working director’s signature only. Held, the deed was invalid.

(iii) Similarly, if a person enters into a contract which is beyond the powers of the
company, he cannot acquire any right under the contract against the company.

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